Documents considered by the Committee on 23 May 2018 Contents

13VAT fraud: cooperation between tax administrations

Committee’s assessment

Legally and politically important

Committee’s decision

Cleared from scrutiny; further information requested

Document details

Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax

Legal base

Article 113 TFEU; consultation procedure; unanimity

Department

Treasury

Document Number

(39299), 14893/17 + ADDs 1–2, COM(17) 706

Summary and Committee’s conclusions

13.1Countries across the European Union experience significant evasion of Value Added Tax (VAT), due to fraudsters exploiting a loophole in the EU’s common system of VAT for cross-border sales of goods (so-called “missing trader” or MTIC fraud).99 The European Commission has estimated that VAT lost to this type of fraudulent activity amounts to €45 to €53 billion (£39 to £46 billion)100 annually.

13.2Administrative cooperation between EU countries to tackle VAT fraud is currently governed by Regulation 904/2010.101 It enables Member States to provide assistance to each other on individual taxpayers to correctly assess, control and collect VAT. It also provides for exchange of information, some of which is automatic—for example relating to the VAT Information Exchange System (VIES), which contains information on businesses involved in intra-EU sales of goods and services—and some of which is on request, or at the initiative of the sending tax authority.

13.3As part of a package of measures of reform of Value Added Tax in the EU,102 the European Commission in November 2017 tabled a proposal amending Regulation 904/2010, to reduce opportunities for VAT fraud. The main objective of the Commission proposal is to amend this legislation to establish a clear legal basis for the use of Member State-held data on businesses for use by a new analytical tool, the Transaction Network Analysis (TNA). This application, which is being set up on a voluntary basis between 25 Member States (but not the UK), aims to provide tax authorities with automated analysis of intra-EU supplies to detect VAT fraud, drawing on information submitted to the VIES by the Member States.103

13.4The Government has expressed its support for the proposed changes,104 provided they “do not encroach on the competence of Member States to run and administer their national VAT systems”.105 The Minister’s original Memorandum did not, however, make clear why the Government has not so far participated in the TNA tool, and what its view is on that element of the proposed Regulation.

13.5When it considered the proposal in March 2018, the Committee therefore asked the Minister to explain why the UK had not joined the voluntary data analysis project within Eurofisc.106 It also requested more information on the Government’s proposals to avoid VAT-related barriers to trade with the EU-27 that would result if the UK leave the EU’s common VAT area (including, but not limited to, the fact that VAT would revert to becoming an import tax charged when goods from the EU enter the country, as is the case for imports from outside the EU). It retained the proposal under scrutiny pending further information from the Minister.

13.6We received a reply from the Financial Secretary (Mel Stride) in May 2018, with further information on the Government’s position on the new anti-fraud measures and on the status of negotiations within the Council on the final legal text.107 The Minister explains that HM Revenue and Customs has reduced annual losses to the UK Exchequer from missing trader fraud from £3–4 billion in 2006 to £0.5–1 billion by 2018 by “improving the identification of the fraud and using a range of measures to tackle the businesses, and individuals behind them, that facilitate the fraud”.108 He adds that the Government introduced a new bespoke penalty in November 2017 to target those businesses and company officers that participate in VAT fraud, such as MTIC.109 As such, the Minister says, “the UK is widely seen in Europe as leading the way in tackling MTIC fraud”.

13.7In response to the specific questions raised by our previous Report, namely why the UK, uniquely110 among the 28 Member States does not participate in the TNA data analysis tool, the Minister added:

“Prior to setting up the new Working Field, HMRC officials were involved in drafting a feasibility study which considered how the tool would operate and its benefits. (…) However, following this exercise the Government continues to have some concerns about the likely efficacy of TNA. There is a lack of evidence to determine whether or not the new tool will be more effective than existing methods in identifying businesses facilitating VAT fraud.

“TNA also raises some potential sovereignty concerns—for example, there is a risk that the new tool will evolve into a wider and more prescriptive joint risk analysis. This could require even more trader data and undermine UK tax sovereignty. It might also lead to HMRC investigators being directed by other Member States as to which businesses they should visit. This is something the UK would not agree to.

“The Commission and the Benelux countries111 have previously stated that the use of Member State’s trader data within TNA would be on a voluntary basis i.e. non-participating Member States would not have to provide this data. It appears that they have now moved away from this position. The proposed changes would allow the TNA tool to access information on cross border transactions held by HMRC that is already accessible to Eurofisc officers in other EU Member States via the VAT Information Exchange System, even if the UK does not join.

“[As] it is unclear that automated access for TNA to this transaction data is provided for under the existing legislation (Regulation 904/2010), the proposed amendments will provide legal clarity on this point.”

13.8The Government’s concerns about the TNA data analysis tool notwithstanding, the Minister adds that the Government “welcomes the legal clarity provided by the proposed amendment to Regulation 904/2010”. He also explains that the new tool is still in the early stages and “will not begin to exchange any trader information before the end of [2018], at the very earliest”. He adds—intriguingly, given the UK’s exit from the EU—that “the UK would be able to join TNA at a later date, should we wish to do so”.

13.9The Minister’s letter also explains that the timetable for adoption of the proposal had been expedited unexpectedly by the Bulgarian Presidency, meaning it was likely to be the subject of a general approach setting out the finalised legal text of the new Regulation at the ECOFIN Council on 25 May 2018.112 In light of this, and the Government’s support for the outcome of the Council’s deliberations, the Minister requested the Committee clear the proposal from scrutiny to allow the Government to vote in favour of the Regulation at that meeting.

13.10We thank the Minister for his update on the proposal to amend Regulation 940/2009. It offers a more detailed insight into the Government’s reasons for not participating in the project to establish the TNA data analysis tool to identify cross-border VAT fraud within the common VAT area.

13.11The Minister’s letter notes that the TNA tool could lead to “sovereignty concerns”, where a more collective approach to risk analysis of trade flows could oblige the tax authorities of one participating country to investigate companies within its jurisdiction on the instruction of another EU country. We note, however, that the Government does not rule out the possibility of joining the TNA project at a later stage (presumably on the condition that it has shown to be more effective at addressing fraud than existing measures, and raises no “sovereignty concerns”).

13.12Given the new tool is open only to EU countries as members of the common VAT area, and will not become operational until the end of 2018 at the earliest, the option for the UK to join would depend firstly on the ratification of the Withdrawal Agreement and its transitional arrangement (during which EU VAT legislation, both existing and new, will continue to apply to the UK). To date, the Government has refused to rule out the possibility of an extension to the post-Brexit transitional period beyond the current end date of 31 December 2020 (which is itself dependent on ratification of the Withdrawal Agreement). While the changes related to the legal basis for the TNA tool may not be problematic, given the UK’s ability to opt out of the project, there is a set of much wider reforms of the Single EU VAT area under consideration.113 Any prolongation of the transition increases the risk that the UK may have to apply changes to its VAT system based on new EU legislation the Government would have blocked had it retained its veto over EU tax proposals.114

13.13Moreover, as we have concluded repeatedly, the UK’s exit from the common VAT area—whether in March 2019 or at the end of any subsequent transitional period—raises its own thorny set of issues for the Government. As is the case elsewhere in the world, HMRC collects VAT on imports on entry of the goods into the country using its system of customs controls. Even where deferral systems exist to allow imports to be released before VAT is paid, this is costly for importers as it requires a bond to be placed with the tax authorities. For intra-EU trade however, an exception applies: the need for VAT border controls has been removed by a common legal framework, institutional architecture and agreements on sharing of trader data on cross-border supplies. In particular, it relies on the VAT Information Exchange System to match records of cross-border supplies between sending and receiving Member States, as shown below.

Figure 1: Operation of the VAT Information Exchange System (Source: European Court of Auditors)

13.14The Minister notes that the UK has been successful at significantly reducing losses due to missing trader fraud (which occurs when criminals exploit a loophole under EU VAT law that allows cross-border sales of goods to be sold into the UK at a zero-rate and without customs controls). HMRC’s work in this area would nevertheless be at risk if negotiations on the Withdrawal Agreement were to collapse: the UK would need to establish, at speed, a new way of monitoring compliance with UK VAT law for imports and exports crossing the land border with Ireland (because HMRC would no longer send or receive information on cross-border sales involving a buyer or supplier based in another EU country via VIES, and there are no physical customs controls on the border).

13.15If the transitional arrangement takes effect in March 2019 as intended, this ‘crunch point’ would be delayed by at least a further 21 months. The Government would still need to decide how to handle the exit from the common VAT system afterwards. While previous correspondence with the Financial Secretary has indicated the Government may be considering seeking an agreement to stay in the common VAT area in the longer term to mitigate these barriers (should the EU agree to this), confirmation of UK policy either way remains absent.

13.16We will continue to press the Government for clarity on these matters, given the possibility of continued alignment with EU law in this area. The UK’s initial discussions on the ‘future framework’ for relations with the EU, including a new economic partnership, are now underway. In this respect, we note that the Government will publish a second White Paper on Brexit in June 2018. We hope that, in the absence of correspondence from the Minister before its publication, this document will at least set out how the Government intends to address the VAT-related implications for trade resulting from the UK’s exit from the EU under the new overarching economic partnership.

13.17With respect to our scrutiny of the TNA proposal specifically, we note that the new data analysis tool will only allow other Member States to use UK-held trader data to which they already have access. As such, we are content to now clear the proposal from scrutiny. However, we ask the Minister to write to us again to inform us when the proposal will be formally adopted by the Council and to include in this update:

13.18Separately, on a broader point, the Government has repeatedly stated that preparations for a ‘no deal’ exit on 29 March 2019 are underway in case the post-Brexit transitional arrangement does not materialise. Given the implications of such a development for cross-border trade with the EU-27 from 30 March 2019 onwards have not been addressed by the Government to date, we ask the Minister to write to us by 8 June 2018 to explain how VAT compliance for both imports and exports wold be monitored for goods moving across the Northern Ireland-Ireland border if the UK exits the EU (and therefore the common VAT area and the VAT Information Exchange System) in March next year without an alternative arrangement with the EU in place.

Full details of the documents

Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax: (39299), 14893/17 + ADDs 1–2, COM(17) 706.

Previous Committee Reports

Twenty-third Report HC 301–xxii (2017–19), chapter 4 (28 March 2018) and Fourth Report HC 301–iv (2017–19), chapter 15 (6 December 2017).


100 €1 = £0.87960 or £1 = €1.13688 as at 30 April 2018.

102 The other proposals in the package concern the place of taxation for intra-EU supplies of goods and services; the restrictions on EU countries when setting VAT rates; and a special scheme that alleviates the administrative burden of VAT for small businesses. We have considered these in separate chapters in this Report.

103 Each national tax authority in the EU, including HMRC, maintains an electronic database containing the VAT registration data of its traders (e.g. the VAT identification number, name and address, and supplies made to other EU countries). The EU’s VAT Information Exchange System (VIES) was set up to allow for that data to be exchanged, in order to enable VAT administrations to monitor and control the flow of intra-EU trade in goods to detect irregularities.

104 In addition to providing a clear legal basis for the exchange of trader data for use by the TNA tool, the proposal would also make various other changes, including improved access for tax authorities to information on car sales and non-EU imports benefiting from a VAT suspension in other Member States (both areas affected by widespread VAT fraud, though with far lower revenue losses than “missing trader” fraud). We set out the substance of the proposals in more detail in our Report of 28 March 2018.

105 Explanatory Memorandum submitted by HM Treasury (17 February 2018).

106 See our Report of 28 March 2018.

107 Letter from Mel Stride to Sir William Cash (15 May 2018).

108 However, a recent EU inquiry found “substantial VAT evasion in connection with imports through the UK by abusing the suspension of the payment of VAT” (the so-called customs procedure 42 for transit of imported goods between EU countries). This allegedly led to losses of VAT revenue for other Member States amounting to €3.2 billion (£2.8 billion) between 2013–2016, but none for the UK Exchequer because the goods were destined for other EU countries. See for more information our Report of 24 January 2018.

110 Eurofisc comprises 6 different working fields, each of it dedicated to a specific VAT fraud area. HMRC participates in Working Field 1, where Member States exchange targeted information relating to businesses that facilitate MTIC, and Working Field 4, where the UK is a “leading contributor” at sharing best practice in how to tackle fraud and evasion. Twenty-five Member States are full participants in the working field 6 (the TNA tool). The Commission’s Impact Assessment for its proposal clarified that Germany and Slovenia are currently observers only.

111 The Minister notes in his letter that Belgium, the Netherlands and Luxembourg are the lead Member States for the TNA project.

112 Although the proposal is subject to the consultation procedure, meaning the European Parliament is not co-legislator, the Council cannot adopt the Regulation until the Parliament has formally delivered its opinion thereon. As such, the ECOFIN Council will adopt a general approach, followed by formal adoption of the Regulation later this year after the Parliament establishes its non-binding opinion (which it is due to do on 2 July 2018).

113 See for more information our Report: “Value Added Tax: EU proposals for reform and the implications of Brexit“ (28 March 2018).

114 In practice it would be all but impossible for the UK to ‘opt out’ of applying changes to the EU’s VAT rules in tandem with other Member States without requiring the re-imposition of customs controls to collect VAT on goods traded between the UK and the EU-27. As we set out in more detail in our Report on EU VAT reform and Brexit of 28 March 2018, any unilateral rejection by the UK of changes to the VAT Directive or its supplementary legislation affecting cross-border trade could be severely disruptive to trade, given the reciprocal and symmetrical nature of the system, including the mechanisms for administrative cooperation under Regulation 904/2010.




Published: 29 May 2015